External rebalancing in turbulent times

Global current account balances widened further in a third consecutive year in 2022. One prominent contributor to the widening in 2022 was Russia’s invasion of Ukraine, which elevated commodity prices amid supply concerns.

The uneven recovery from the COVID-19 pandemic—across countries and sectors—and the rapid tightening of US monetary policy also contributed to the widening of global balances, offsetting the impact from unwinding of pandemic-induced fiscal measures.

Concurrently, the US dollar appreciated substantially, and the uphill capital flow—capital flowing from faster-growing emerging market and developing economies (EMDEs) to slower-growing advanced economies—reappeared.

China’s reopening and the US banking sector turmoil were the new forces that could have important implications on global balances in early 2023.

The reopening of the Chinese economy led to a temporary rebound in exports in the first quarter of 2023 as supply chain conditions improved, contributing to a widening of global trade balances. 

The unexpected failures of two large regional banks in the United States and a systemically important global bank in Europe have had limited impact on cross border capital flows and currency volatility so far, owing to forceful policy actions undertaken to reassure markets and shore up the banking sector. 

However, as banking sector turmoil has tightened credit conditions and curtailed lending, market participants now expect a shallower monetary policy path in the United States, which has provided some support to EMDE currencies.

The widening of global current account balances is expected to reverse in 2023, as the impacts of the pandemic and Russia’s war in Ukraine recede.

Policy actions will also help narrow excess global balances—those beyond what can be explained by medium-term fundamentals and desirable policies—albeit gradually and over the medium term. 

However, there is a high degree of uncertainty surrounding this outlook. Risks include a renewed increase in commodity prices and a slower-than-expected pace of China’s recovery or of fiscal consolidation in economies with current account deficits. 

In addition, a severe tightening of global financial conditions could trigger broad-based capital outflows from vulnerable EMDEs, and further geoeconomic fragmentation could potentially lead to large welfare losses, including through its effects on trade barriers and foreign direct investment.

Developments in current account balances

Commodity prices increased in 2022, enlarging the differences in current account balances between commodity importers and exporters. In the aftermath of Russia’s invasion of Ukraine, commodity prices soared amid concerns about a shortfall in global supplies from Russia and Ukraine and trade disruptions caused by the war itself. 

Oil prices then started falling from their peak in mid-2022, as demand growth from major economies, such as China, slowed and trade diversion enabled a steady supply of Russian crude oil to the global market. 

European gas prices had risen to a stratospheric level amid supply disruptions but declined, owing to substitution efforts and an exceptionally mild winter that reduced demand. 

Food prices also began to fall around the same period as supply and demand reacted to higher prices, including through the reopening of the Black Sea corridor, increased wheat production in Europe and India, and lower demand for price-elastic items. 

Despite the decline since mid-year, average commodity prices in 2022 were higher than those in 2021 and well above their pre-pandemic levels. 

An uneven recovery from the COVID-19 pandemic 

As health conditions improve across the globe, the impact of some critical pandemic factors on current account balances has been waning. These factors include medical trade, as demand for medical products and personal protective equipment has declined. 

The impact on trade balances from a shift in household consumption away from services toward goods appears to have approached a new normal, as the services trade balance is projected to expand at its pre-pandemic growth rate, though remaining below its pre-pandemic level.

Nonetheless, the emergence of especially contagious, but less lethal, COVID-19 variants continued to materially affect some economies’ external balances in 2022.

The resulting travel shock is estimated to have materially lowered the travel services and current account balances of a few tourism-exporting countries such as Thailand. 

While shipping costs abated in the second half of 2022, the yearly average remained high compared with the historical average. As a result, they continued to increase the current account balances of economies with large presences of shipping companies.

Given those developments in pandemic-related factors, the medical and consumption shift adjustors have been discontinued for 2022, while the transportation and travel adjustors have continued to be applied in the 2023

Contribution of cyclical factors

Cyclical factors played a more important role in the widening of the global balances in 2022 compared with previous years.

The contribution of cyclical factors to the global balances reflected the elevated commodity prices, which pushed the terms of trade for commodity-exporting and -importing countries in opposite directions. 

It also reflects the impact from output gaps as economies were in different phases of recovery: weak domestic demand led to a stronger current account balance, via factors including lower investment, and vice versa for economies with stronger domestic demand.

Policy actions

Fiscal policies in 2022 likely moderated the increase in global current account balances.

On average, economies with current account deficits consolidated their fiscal policies in 2022 relative to 2021, while economies with current account surpluses loosened their stances. 

Among deficit countries, Canada, Türkiye, the United Kingdom, and the United States reduced their (cyclically adjusted) fiscal deficits; among surplus economies, China, Japan, Korea, and The Netherlands increased theirs. 

However, the strengthening of the US dollar widened the US current account deficit. Government and household saving in advanced economies moved in opposite directions, while corporate saving remained above pre-pandemic levels. 

Despite the budgetary support deployed (about 1.3 percent of GDP in the case of the European Union) to help households and firms weather the energy crisis, public sector saving improved in 2022 relative to 2021 in many economies, mostly reflecting the unwinding of temporary support measures deployed during the pandemic. 

Against this background, household saving declined, notably in the United States, where the saving rate fell below pre-pandemic levels.

On the other hand, since mid-2020, corporate saving has remained high in the United States and several other advanced economies compared with pre-pandemic levels.

In the early months of 2023, trade data suggest that global trade balances widened compared with their levels at the end of 2022, driven by the reopening of China offsetting the impact from falling commodity prices. 

China’s exports temporarily improved in the first quarter of the year against the backdrop of relaxed testing and quarantine requirements and normalization of supply chains; imports also increased from the previous quarter, but less than exports, reflecting subdued imports of intermediate goods amid growth led by private consumption that is less import intensive. 

The improvement in China’s trade surplus has so far more than offset the narrowing of the surplus in commodity- exporting economies, but China’s trade surplus is expected to shrink with a significant anticipated pickup in tourism travel in the remainder of 2023.

Currencies, financial flows, and balance sheets

In the past year and a half, the currency market has experienced significant fluctuations. The US dollar, in real effective terms, was about seven percent stronger in April 2023 compared with its 2021 average, while some EMDE currencies have weakened considerably. 

Between 2022 and March 2023, the US dollar appreciated more with respect to advanced economy currencies, on average, than with respect to EMDE currencies, in part due to less favorable terms of trade in advanced economies relative to those in EMDEs.

• By October 2022, in real effective terms, the US dollar had appreciated by about 14 percent relative to its 2021 average, reflecting economic fundamentals such as rapid tightening of monetary policy in the United States, as well as more favorable terms of trade. 

However, it has since depreciated by about six percent on a real trade-weighted basis, reflecting a change in expectations of US monetary policy and improved risk sentiment. 

Despite this, the dollar remains stronger than it has been since 2000.

• By contrast, as of April 2023, other major currencies have either remained broadly unchanged (such as the euro and the pound sterling) or depreciated, including the Japanese yen by 15.3 percent and the renminbi by 7.6 percent, in real effective terms compared with their 2021 averages. The depreciations were driven by interest rate differentials, high energy prices and different speeds of economic recovery.

• In EMDEs, currency movements have been more heterogeneous. While currencies in some economies, such as Brazil and Mexico, appreciated in nominal effective terms in 2022 and early 2023, those in other economies—including Argentina, South Africa, and Türkiye—depreciated significantly. 

The monetary tightening in advanced economies has put depreciation pressure on all EMDE currencies; however, country-specific factors such as earlier monetary tightening (than in advanced economies), preexisting vulnerabilities (such as lower perceived institutional quality), and commodity exposure have led to these different currency movements. 

The Russian ruble appreciated significantly in the second quarter of 2022 under restrictions on imports and capital outflows, but it has since depreciated against the US dollar, largely owing to weaker terms of trade and a sharp increase in parallel imports.

The widespread depreciation pressure of 2022 was evident in a more comprehensive measure of market pressure. The realized change in exchange rates may only be a partial measure of external pressure, as economies can resort to foreign exchange intervention or interest rate changes to cushion such pressure.